Why will erratic construction spending influence interest rates?

Construction spending figures for the month of December were issued on February 3. The U.S. Census Bureau of the Department of Commerce estimated construction spending during December 2013 at a seasonally adjusted annual rate of $931 billion, just 0.1% above the revised November estimate of $930 billion. December’s figure is 5.3% above the December 2012 estimate of $884 billion.

The value of private construction (unadjusted) was estimated at $627 billion in 2013, 8.5% above the $578 billion spent in 2012. Residential construction in 2013 was $331 billion, 18% above the 2012 figure of $280 billion, and non-residential construction was $297 billion, 0.4% below the $298 billion in 2012.

More support for further tapering

The year-on-year increase in construction implies that the economy is expanding, which supports the Fed’s intention to continue tapering its purchase of agency-backed mortgage securities and longer-term Treasuries.

The long-term trend shows that construction is on a clear uptrend, so recovery is indeed happening. Plus, the increase in residential construction shows that the housing sector is truly strengthening.

Agency-backed lenders Fannie Mae (FNMA) and Freddie Mac have increased their fees. In turn, lenders will pass on the increase to borrowers in the form of higher interest rates for residential loans. This will negatively impact residential builders such as Pulte Homes (PHM).

To see what all these indicators mean for the economy, move on to Part 7 of this series.